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Monthly Archives: May 2012

Comstock Resources this afternoon completed an SEC-registered senior notes offering via bookrunners Bank of America, BMO, and J.P. Morgan, sources said. Terms on the B-/B3 deal were inked at the middle of talk, with a $50 million upsizing, to $300 million. The Frisco, Texas-based oil-and-gas company seeks capital to repay amounts borrowed under its revolving credit facility. As of May 1, the borrowing base was $570 million, plus an additional $85.5 million available through the end of the year, for a total of $655.5 million. As of May 31, 2012, the total outstanding principal balance under the bank credit facility was $570 million, at a weighted average interest rate of 3.5%. Borrowings were primarily used to fund development and exploration expenditures, according to SEC filings. Terms:

Dynegy Holdings has reached a settlement with the two holders of its subordinated debt that had been seeking to block the company’s proposed settlement of potential fraudulent-conveyance claims, removing the final hurdle to and clearing the way for the company’s reorganization to move forward.

According to documents filed yesterday with the bankruptcy court in Poughkeepsie, N.Y., the two subordinated noteholders, Claren Road Asset Management and CQS DO SI Ltd., withdrew their objections to the proposed settlement and to the plan-support agreement reflecting the settlement’s terms. A hearing on the settlement and agreement remains scheduled for tomorrow, but it now looks now to be a consensual, as opposed to a contentious, affair.

Wells Fargo, the indenture trustee for the subordinated debt, also withdrew its objection to the settlement and agreement.

Under the newly struck deal, subordinated debtholders will be given an allowed subordinated debt claim of $222.5 million, reflecting $206.2 million in principal and $16.3 million of accrued but unpaid interest. Further, in settlement of that debtholders would receive an allowed unsecured claim of $55 million, which would be treated pari passu with other unsecured claims, the distribution for which is comprised of 99% of the reorganized company’s equity plus $200 million in cash. Based on an estimated recovery range for unsecured claims of 60-87 cents on the dollar as calculated by LCD (see “As Dynegy crafts new plan, senior note recovery rate could suffer,” April 13, 2012), that would appear to translate into an estimated recovery range of 15-21.5 cents on the dollar for the subordinated debt.

The subordinated debt was recently pegged at 20/22, according to sources.

Under the settlement, Claren Road and CQS will also receive $2 million for their attorney and advisor fees, and Wells Fargo will receive $300,000 for its professional fees.

Under the company’s initial proposed reorganization plan, subordinated noteholders would have received an allowed unsecured claim of 35 cents on the dollar, or about $70 million, which under the terms of that plan would have equated to a recovery range of 22-33 cents on the dollar, depending upon the company’s ultimate enterprise value.

Claren Road and CQS were the only parties in the case actively seeking to block the company’s proposed settlement, so the new agreement obviously clears the company’s path to a Chapter 11 exit.

During a conference call earlier this month, Dynegy placed its outside date for emerging from Chapter 11 at Sept. 28. According to the timetable laid out by the company at that time, Dynegy would file its new reorganization plan and disclosure statement by May 30, a court order approving the disclosure statement would be obtained by July 15, and the bankruptcy court would confirm the reorganization plan by Sept. 10.

A proposed plan and disclosure statement have not yet been filed, however, although it is not immediately clear, in light of the settlement, whether that signals an overall delay the company’s proposed emergence from bankruptcy. – Alan Zimmerman

The Pep Boys – Manny, Moe & Jack announced on Tuesday that it agreed to terminate the proposed $1 billion buyout of the company by the Gores Group.

The cancellation of the $15-per-share deal, which was announced in late January, comes roughly a month after Gores Group asked to delay the shareholder vote on the buyout by 30 days, pointing to a “serious deterioration” in the automotive-parts retailer’s business. Pep Boys shares plunged nearly 23% on the news this morning, to $8.57.

The Gores Group agreed to pay Pep Boys a $50 million fee and to reimburse the company for certain merger-related expenses “as settlement for any and all potential claims that Pep Boys could assert under the terms of the merger agreement,” Pep Boys said in a statement.

The company said it plans to use the settlement proceeds, along with cash on hand, to refinance its term loan this year ahead of its October 2013 maturity. There was about $148 million outstanding under the term loan as of Jan. 28, SEC filings show.

In the secondary market, the company’s term loan (L+200) is little changed this morning, quoted at 99.5/100.25, versus a 99.25 bid yesterday, sources said.

The company said next year it plans to refinance its 7.5% subordinated notes due 2014, of which there is about $148 million outstanding.

Pep Boys had $58.2 million of cash and cash equivalents as of Jan. 28.

As reported, Credit Suisse and Barclays Capital had committed to provide a $425 million, first-lien term loan and a $125 million second-lien term loan to help finance the buyout, while Wells Fargo and Barclays committed to provide a $325 million asset-based revolving credit, according to SEC filings. The Gores Group was to kick in $489 million of equity.

Philadelphia-based Pep Boys has more than 700 locations in 35 states and Puerto Rico. The chain offers automotive service, accessories, tires, and parts. – Kerry Kantin

Hawker Beechcraft won final approval of its amended $400 million debtor-in-possession facility at a bankruptcy court hearing in Manhattan, along with a series of routine “second-day” motions.

Hawker, which filed a pre-arranged Chapter 11 on May 3, won interim approval to access up to $300 million of the facility at a hearing of the company’s first-day motions. (Judge Stuart Bernstein is assigned to the case and granted his final approval of the motion yesterday, but Judge Sean Peck presided over the original hearing, which was scheduled while Bernstein was out of town.)

As LCD has reported, the DIP is priced at L+800, with a 1.75% LIBOR floor, an OID of three points paid in full at closing, and a 5% participation fee. The first $124.5 million of the DIP will be used to repay the senior tranche advance Hawker entered into in late March in connection with the forbearance to its credit agreement. Both the forbearance and the DIP were provided by a group of four lenders, the so-called “Big Four”: Centerbridge Partners, Angelo, Gordon & Co., Sankaty Advisors, and Capital Research & Management. Credit Suisse is the administrative agent for the facility.

The DIP includes $35 million for payment of fees, about $90 million to fund operations, and a $50 million cushion, according to Pat Nash, a partner at Kirkland & Ellis representing Hawker.

At today’s hearing, Nash said that the final terms of the facility were continuing to be revised until as recently as 1:40 a.m. EDT last night. The company received four objections to the DIP, all of which were resolved prior to the hearing. One of the objections, from an ad hoc committee of minority secured lenders holding about $200 million of Hawker’s $1.7 billion of senior debt, was resolved when Hawker agreed to pay the group’s legal fees. Nash said Hawker has wired $300,000 to the group’s legal counsel at Brown Rudnick, which Nash said was warranted because the firm has a role to play in representing the non-Big Four lenders in finalizing equity documents under the plan. Among the more significant members of that group are D.E. Shaw & Co., KKR Asset Management, Foothill, Wayzata Investment Partners, Stone Lion Partners and Crescent Capital Group, court fillings show.

According to the term sheet attached to Hawker’s restructuring-support pact, roughly $921.6 million of the company’s $1.702 billion in senior credit facility claims will be allowed as a secured claim, and will receive 81.1% of the equity in the reorganized company. The remaining $780.9 million in claims under the credit facility will be allowed as an unsecured deficiency claim, and will share with other unsecured creditors on a pro rata basis in the remaining 18.9% of the new equity.

The next omnibus hearing in the case is scheduled for June 27. – John Bringardner

Rivers Pittsburgh Finance today completed an offering of second-lien notes via leads Goldman Sachs, Wells Fargo, and Credit Agricole, according to sources. Final terms pegged the tight end of talk, and follow-on demand indicates a gain of over one point on the break, according to sources. The size of the deal declined to $275 million, from $300 million, as bank demand for the concurrent A term loan at L+375 allowed for a $25 million upsizing, to $185 million. Proceeds from the financing, along with about $65 million of cash on hand, will be used to repay $302 million of first-lien debt and approximately $184 million of senior preferred PIK interests, according to S&P Capital IQ. Financing also includes a $15 million revolving credit facility. Terms:

Sprint Nextel disclosed that it has obtained entered into a $1 billion, five-year credit facility to back its equipment purchases from Ericsson. The company also disclosed today that plans to redeem a portion of its 6.875% notes due 2013 on June 8.

Deutsche Bank acted as mandated lead arranger.

The revolver has covenants similar to Sprint’s existing $2.2 billion revolver.

Sprint plans to redeem the notes at par, plus accrued and unpaid interest until the redemption date. After the retirement, there will be approximately $473 million outstanding under the notes, according to a company statement.

Dewey & LeBoeuf is “without question the largest U.S. law firm ever to fail,” Albert Togut, the firm’s lead bankruptcy counsel, told the court Tuesday afternoon at a hearing of the firm’s first-day motions in Manhattan.

The bankruptcies of other large firms – like Coudert Brothers or Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey – dragged on for years, with professional fees chipping away at the minimal recoveries made on collection of accounts receivable. In the case of Finley, Kumble, in 1987, collections ranged between 9-25%, said Togut, who worked on the case himself.

But this time will be different, Togut insisted, because unlike those previous cases, many Dewey partners have cooperated on the wind-down of the firm, and are continuing to do so. That does not preclude collection actions aimed at some former Dewey partners, Togut noted.

Tuesday’s hearing started slightly behind schedule, but Judge Martin Glenn let Togut launch into his opening remarks without much preamble, perhaps because the legally savvy audience in the courtroom wouldn’t need the typical explanation of the proceedings. Togut pointed out two Dewey partners – Janis Meyer, the former general counsel for the firm, and Stephen Horvath, who was head of the firm’s mergers and acquisitions practice in London – who have agreed to stay on and help with the wind-down of the firm.

Their help is an example of why Dewey waited as long as it did to file for Chapter 11 protection, Togut explained. The firm has already gone from 1,300 employees in the U.S. to just over 100, and plans to pare that down to 90. Dewey has already closed its U.S. offices outside of New York, and is in the process of shrinking its Manhattan office down to a single floor, from its previous 13.

Togut also said Dewey is actively engaged with its lender group, led by J.P. Morgan, and its advisers at FTI Consulting. “Our goal is to get a negotiated settlement, without the staggering expenses you see in case after case,” Togut said. “It’s going to cost them significant money if we get to a deal,” he added, without elaborating. J.P. Morgan serves as collateral agent for both the debtholders under the firm’s credit agreement, and its $150 million private placement.

A hearing on the firm’s second-day motions is scheduled for June 13. – John Bringardner

In April, the assets under management of loan mutual funds increased 2.2%, to an eight-month high of $75.8 billion, from $74.2 billion in March, according to Lipper FMI.

During the first two weeks of May, inflows continued apace despite overall jitters in the capital market stemming the latest flare-up in Europe’s long-running debt crisis. In the month to May 16, loan funds that report daily flows to EPFR – this excludes monthly filers – took in $343 million of net new cash. On a run-rate basis, that is 23% increase of April’s full-month tally of $557 million. Moreover, following the pattern in the high-yield market, the Invesco Powershares’ Loan EFT (BKLN) – which is based on the S&P/LSTA Loan 100 – was significant contributor so far in May, accounting for 46% of inflows in the month as of May 16, or $158 million, according to EPFR, up from 33% earlier in the year.

Recent loan market retreats, however, may cause retail investors to pause. Earlier this month, after resisting overall weakness in the capital markets, the S&P/LSTA Loan 100, the best proxy for loan mutual funds, traded off 1.02%, the most severe decline since Oct. 4, 2011.

In response, the exchange-traded, closed-end loan fund prices slumped, leaving just one of the 21 such products listed on CEFConnect.com trading at a premium to NAV on May 17. By comparison, seven funds traded at a premium to NAV at the end of April.

These jitters notwithstanding, managers say that loan funds continue to appeal to investors for all the obvious reasons, including their unique combination of relatively wide distribution yields – of 4-5% after fees – and utility as a hedge against higher rates. That may insulate the funds from significant withdrawals even if Europe’s travails intensify and further sap investor sentiment.

Still, as the last year has shown, loan funds are subject to the same risk-on/risk-off mentality that drives the broader markets. Therefore, managers think that loan funds will succumb to outflows if the summer brings the same sort of disruptive event that stalled the market during the past two years. – Steve Miller

In April, covenant-lite loans reached a post-credit-crisis milestone by capturing 40% of total institutional new-issue volume, the most since November 2007.

Viewed through a wider lens, however, the trend is less dramatic. Covenant-lite loans represent a more modest 22% of 2012 volume (as of May 16), down from 27% during the comparable period in 2011, when market conditions were even more robust.

For this reason, the percent of S&P/LSTA Index loans that are covenant-lite has increased just slightly, to 24.3% as of May 11, from 24.1% at year-end.

Of course, covenant-lite activity, like clearing yields, generally tracks the market. Therefore, arrangers expect incurrence-test-only loan activity to continue apace in the near term as paper forged in the hothouse conditions of February and March rolls into the market. Indeed, the forward calendar is dominated by such loans.

Further out, participants speculate that the recent cooling in the primary market may put a damper on covenant-lite activity, for obvious reasons.

Covenant-lite stats
On an apples-to-apples basis, arrangers say issuers pay a small premium to avoid maintenance tests – after all, financial covenants are effectively a repricing option that lenders can exercise if an issuer’s financial heath declines. Participants estimate the premium at 25-50 bps. The only evidence, though, is circumstantial: in late April, Schrader International’s $235 million, six-year first-lien term loan cleared at a roughly 50 bps premium to talk – L+500/1.25%/98, versus L+450-475/1.25%/98.5 – after the B/B2 issuer stripped covenants. However, sources speculate that had Schrader approached investors with a covenant-lite deal initially, it might have seen a tighter execution.

The truth, though, is that no one really knows how much more issuers pay to avoid maintenance tests. Here’s why:

In time-honored fashion, the recent batch of covenant-lite loans skews toward the more desirable issuers. That is apparent in clearing yields, what with incurrence-test-only loans printing, on average, inside loans with maintenance tests.

Even controlling for rating, this pattern holds true, suggesting that within a credit-quality bracket, issuers that are more creditworthy command both better spreads and looser structures.

Covenant-lite structures remain less prominent in the middle market, accounting for 11% of 2012 volume for issuers with $50 million of EBITDA or less, versus 22% for loans to larger borrowers.

Historical performance
Perhaps because stronger issuers have the muscle to avoid maintenance tests, covenant-lite loans have generated superior returns. Since January 2006 – the first date for which there is a statistically significant sample – covenant-lite S&P/LSTA Index loans outperformed covenant-heavy loans, at 39.28% to 36.36%. The pattern has held in 2012, with incurrence-test only loans ahead 5.18% to 4.86% as of May 14.

These statistics are even more remarkable considering that among loans outstanding as of Dec. 31, 2007, 23% have since has covenant amendments that pushed spreads up an average of 198 bps. In comparison, only 9% of covenant-lite loans have been repriced higher since that date via a waiver or amend-to-extend.

The reason for the return gap is simple: covenant-lite loans have enjoyed a lower default experience over time – another sign of positive bias in the sample. Of the S&P/LSTA Index loans that were outstanding at year-end 2007, just before the default rate spiked, 9.3% of covenant-lite loans have defaulted, versus 14.7% of covenant-heavy loans. And the gap may grow further still. After all, TXU, the biggest potential pending defaulter by a wide margin, has a covenant-heavy loan.

As for recovery levels, there doesn’t seem to be any daylight between covenant-lite and covenant-heavy loans. Take the average price of loans at default. Since 2007, the average for covenant-lite loans is 52.3 cents on the dollar, one cent inside the 53.3 average for covenant-heavy loans. – Steve Miller